Gold is on the way back

Is now the time to get back into gold stocks? Not quite, but the moment could be approaching fast, according to analysts at broker CIMB, who believe investors should be starting to plot their return to the decimated sector.

Last year was a horror one for gold and those with an exposure to the metal or the companies that mine it.

The gold price slumped 28 per cent to $US1205 an ounce, the worst performance since 1981, when it fell 32 per cent.

Locally listed miners of the yellow metal, as measured by the S&P/ASX All Ords Gold Index, plunged an even more dire 61 per cent. All of which suggests that investors are right to exercise some caution.

“It would be brave to say we are at the bottom but it’s not much of a stretch to look at where valuations are now and say that some of these things are pretty cheap," said David Coates, a resources analyst at CIMB.

“Most people are either underweight or naked this sector, so to open a position at this point in time is not a massive risk."

He points out that the All Ords Gold Index is around historic lows when compared to the gold price in ­Australian dollars, and that’s despite a 16 per cent surge in the index over the past month.

Mr Coates said his conversations with investors suggest they are happy to miss the first 20 per cent to 30 per cent rebound in the sector but he notes that on that criterion alone the re-entry point may be approaching fast.

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A bullish few months

The market has re-rated gold miners at a rapid pace in recent weeks as the price of the metal has stabilised over the new year period.

Over the past month shares in
Silver Lake Resources
have popped 50 per cent, while
Ramelius Resources
and
Perseus Mining
are up 41 per cent and 35 per cent, respectively.

Even shares in the troubled
Newcrest Mining
have gained 20 per cent against the broader market’s 3.8 per cent.

“One of the things those moves indicate to me is that the market is taking, at the very least, a less bearish view on the gold price and that it will settle at a higher level than people have factored in," Mr Coates said.

In a bullish sign, the past few months have also seen a strong pick up in merger and acquisitions activity across the sector, with six deals being completed by ASX-listed goldminers since the start of December alone.

“As the bottom of the market approaches we see more companies willing to accept prices they have ­previously held out against and acquirers seeing little downside from the ­valuations they are paying," reads the CIMB note.

The closure of marginal operations and industry consolidation has made the industry “leaner and more competitive" while a weaker Australian dollar would also work in the favour of local producers.

The CIMB analysts have positive ratings on Newcrest and Perseus, and also highlight
Evolution Mining
,
Regis Resources
,
Northern Star
and
OceanaGold
as potential investments for those ready to take the plunge back into the decimated sector.

Most of the five are “multimine producers with strong management, robust balance sheets" and a cost ­structure “that can see them through the current gold price environment", they write.

The exception is Perseus, a single-mine producer but which has sufficient leverage to the gold price to make it a valid pick on a risk-reward basis.

No slump but no boom either

While expectations of big further slumps in the gold price appear to be making their way out of stock valuations, there’s no expectation of a return to the gold boom of the past decade.

Analysts at Bank of America-Merrill Lynch downgraded their short and long-term forecasts for the yellow metal by around 10 per cent.

They expect it to fetch $US1150 an ounce on average this year, $US1256 an ounce next year, and $US1400 in 2016.

With a soft gold price in 2013, the BOM-Merrill Lynch analysts prefer miners with low costs and strong balance sheets.

Their preferred picks are Aquarius Gold, which they rate a “buy", and they say they are “warming" to Newcrest but remain “neutral".

A further fall in the gold price would make life difficult for local gold mining industry, Mr Coates warned.

He identified Silver Lake Resources, Resolute Mining and Troy Resources as some of the lowest cost gold producers in the country, and therefore more resilient to further weakness in commodity prices.

“At a gold price of $US1000 an ounce there are very few gold mining operations in Australia that would be making money but those three would come close," he said. But he was optimistic that gold would remain above what he sees at a potentially key support level of $US1180 an ounce.

“The price of gold has stabilised in the face of tapering becoming a reality and central banks remain committed to gold as a reserve asset."